January 7, 2018

January 7, 2018

The market made it four-for-four in 2018, rallying strongly every day this week. On Thursday, the Dow Jones Industrials cleared the mythical 25,000 level, bringing out “Dow 25,000” hats on the floor of the NYSE. These days, however, the exchange is a ghost town compared to what I remember it as back in the day when I used to roam on the floor with our floor brokers at William O’Neil + Co., Inc. The media did a great job, however, of making a handful of NYSE floor denizens look like a crowd in its well-placed camera shots.

The move on Thursday reminded me of an old IBD workshop way back in 1995 when Bill O’Neil used to charge $695 for a full day of instruction, and if you were lucky he might sit at your table for lunch. At that specific workshop, in response to a question, he said that yes, some day the Dow would no doubt go to 25,000. That brought out several guffaws and harrumphs from the crowd, but it sounded reasonable to me.

On Thursday, I finally saw it happen, over 22 years later. A momentous event for the media, no doubt, but for me it helped to conjure up old memories of “the master.” Once again, Bill was right! That memory certainly brought a smile to my face Thursday morning right after the opening bell rang and I saw the numbers tick through 25,000.

Meanwhile, all the major market index charts look the same. All were up every day this past week, making the first week of 2018 a sort of running of the bulls. The indexes are therefore somewhat extended at this juncture. Some might find reason to be concerned with the idea that the indexes, as expressed by the daily chart of the NASDAQ Composite Index, below, have just broken out of a fourth-stage base.

I wouldn’t be too concerned about this, since it’s still a matter of finding the right stock set-ups and going with them when you see them, regardless of what you may have thought the week before or even the day before. And whether the indexes are showing late-stage breakouts is equally irrelevant. The whole late-stage concept is not meaningful with respect to the indexes, and not even that meaningful with stocks, as far as I’m concerned. Late-stage is as late-stage does, and until things break down, we’re still in an uptrend.

Friday’s jobs number came in a little weak, which seemed to be a case of bad news is good news, since it is viewed as keeping the Fed from getting too aggressive in 2018. The action in gold was probably already telegraphing this as it has now been up four weeks in a row as the dollar has trended in the opposite direction. SPDR Gold Shares (GLD) has now been up four weeks in a row, the first time it’s done that since coming up off the lows of December 2017. It remains extended from any lower-risk entry point at this time.

CSX Corp. (CSX) has made it all the way back up to its prior highs, where it was at before all the CEO news hit the stock and knocked it down to the 200-dma. On the weekly chart, we can see that the stock is sitting on top of a prior base, and technically could be considered buyable here as a base “re-breakout.” It did post a new all-time weekly closing high on Friday on increased weekly volume. Earnings are expected on January 16th.

Caterpillar (CAT) pinged right off its 10-dma and into new high price ground on Thursday. That’s how a leading stock should act on a retest of its nearest moving average. In the old days, when stocks had strong upside momentum, the 10-dma was a reliable guide for support, and that has turned out to be the case for CAT. Meanwhile, the weekly chart, below, shows the quasi-parabolic run continuing. Earnings aren’t expected until January 25th.

The weekly charts of many big-stock NASDAQ names seem to imply that we are in the midst of a new up leg. Here we see Netflix (NFLX) breaking out of a base-on-base formation on strong weekly volume. While the pocket pivot down at the 50-dma was the most optimal entry for building a profit cushion ahead of earnings, this is still within range of a technically buyable base breakout for you base-breakout buyers.

The news noise in Apple (AAPL) over the past couple of weeks looks less frightening on the weekly chart. With earnings expected on January 30th, AAPL is just working its way sideways in what is now a five-week base. Is a breakout coming? A lot of these big-stock NASDAQ techs have been building bases of various sorts over the past two months or more, and it is quite possible that they have undergone enough base-building to trigger new up legs from here.

Facebook (FB) posted a breakout from a five-week base this past week on the weekly chart. Note how the action was relatively tight the prior wo weeks as volume declined during the holidays. That led to the pocket pivot on Tuesday, the optimal entry point, that was followed by an eventual breakout to all-time highs later in the week. If you like to buy base breakouts, here you go! Earnings are expected on January 31st.

Amazon.com (AMZN) is another breakout from a five-week base on the weekly chart on higher weekly volume. As I noted in my Wednesday report, the breakout occurred on that day on a pocket pivot volume signature, which technically made it buyable using the 10-dma as a selling guide. For you orthodox breakout buyers, this remains within buying range. Earnings are expected on February 1st.

Nvidia (NVDA) had a strong buyable gap-up/pocket pivot move up through its 50-dma on Wednesday, as I discussed in my report of that day, and is pushing up to the highs of a seven-week base. Maybe it forms a little handle here and then breaks out. The low-base entry came on Wednesday, however, and now one must wait to see if and whether this sets up for a bona fide base breakout ahead of earnings, which are expected on February 8th.

Tesla (TSLA) broke down following the release of its sales and delivery numbers after the close on Wednesday, leading to a break below the prior lows around the 310 price level. That triggered a near-term U&R type of move that has brought the stock back up into its 50-dma. It’s tough to gauge what the stock will do from here, but a move back up through the 50-dma would confirm the U&R on a purely technical basis, without getting all caught up in how misleading the company is with their sales and delivery projections and promises.

If it clears the 50-dma, it could very well turn into a long trade. But if it rolls away from the 50-dma on the downside, then it’s a short right there using the 50-dma as a guide for a tight upside stop.

Roku (ROKU) was acting well after posting a pocket pivot on Wednesday at the 10-dma. But a downgrade from Morgan Stanley (MS) to “underweight” sent the stock on a brutal downward spiral. The 20-dema served as my guide for maximum downside support, and when it failed to hold that all bets were off on ROKU.

For those of you who follow the blog comments page, I pointed out that the move on Wednesday was probably something to sell into given the strong U&R move off the 20-dema earlier in the week. I also commented on the blog page and on Twitter that I felt ROKU’s run was probably over at that point and should be left alone. That was on Thursday, before the stock gapped below the 20-dema on Friday. Nothing to do now but see if it sets up again.

Apptio (APTI) remains within range of last week’s base breakout. Nothing else to say here as remains low. The 10-dma would serve as a tight selling guide.

MuleSoft (MULE) is extended from its prior low-base range breakout. However, but as I’ve discussed in previous reports this was buyable along the 50-dma when it was acting quietly.

Cloudera (CLDR) came through with an undercut & rally (U&R) move yesterday off the lows of is current three-week price range. That move carried back up through the 20-dema and up to the highs of the range. It also qualified as a single five-day pocket pivot.

CLDR is now extended, as I considered the best, lower-risk entry to be down near the lows of the current price range as discussed over the weekend. In addition, the U&R set-up was the key buy trigger to look for yesterday, so you either caught it there or you didn’t.

Rise Education Cayman Ltd. (REDU) is still extended from its prior base breakout but the 10-dma has now risen to 14.18. This is starting to get closer to the current price, and would represent your reference point for any lower-risk opportunities if and when the stock was to meet up with it.

Another hot IPO I’ve been watching for a while, and which most of you probably already know about, is Stitch Fix (SFIX). The stock had a strong breakout two weeks ago and has since drifted right back to its breakout point and the 20-dema. Volume has dried up as the stock has found support at the 20-dema, which makes it buyable using the line as a tight selling guide.

I tend to think, however, that the best entry point for the stock was after it reported earnings and gapped down eleven days ago on the chart. The next day it pulled a little undercut & rally move back up through the lows off mid-December, and then regained the 10-dma the next day. That would have then set one up to participate in the big breakout and jack to the upside two weeks ago.

Salesforce.com (CRM) is back up to its prior highs and out of range of Tuesday’s pocket pivot coming up through the 50-dma. I was hoping we might see a quick retest of the 50-dma as a lower-risk entry opportunity. It’s smaller cousin, Workday (WDAY), may, however, be in buying range of a gap-up (but not a buyable gap-up) pocket pivot it posted on Thursday. It held that move tightly on Friday, with volume drying up to -47% below-average. That could be considered buyable using the 50-dma, 2.6% lower, as your selling guide.

Square (SQ) has come to life in a meaningful way this past week. I noted in my Wednesday report that the U&R move early in the week was buyable at that point, using the 20-dema as a selling guide for you followers of the Ugly Duckling. Perhaps I should make that Disciples of the Ugly Duckling. In any case, you get the idea. Also recall my discussion of the stock last in my December 27th report where I was looking for a possible descending wedge breakout through the top of the formation as outlined on the chart below.

This coincided with a U&R move on Tuesday, and the stock gained a little more momentum on Wednesday. It then paused at the 50-dma on Thursday, and finished out the week in a flurry as it blasted up through the 50-dma on a strong-volume pocket pivot move. Obviously, the optimal entry was either lower in the pattern on the U&R and descending wedge breakout, or right near the 50-dma Friday morning.

As long as we’re dwelling within the realm of the Ugly Duckling, let’s take a look at Weight Watchers Int’l (WTW). Here we see a stock that has failed on two previous base-breakout attempts to all-time highs. Two Fridays ago, the stock then burst below the 50-dma on heavy selling volume looking for all the world like a late-stage failed-base short-sale set-up in motion.

In fact, I viewed it that way initially, and tried to short it as it came up through the 50-dma and into the 10-dma on Tuesday. However, I could get a sense of the strong bid in the stock, since it did post a pocket pivot at the 50-dma that day on higher volume than the prior sell-off below the 50-dma. That gets me thinking that maybe this is an Ugly Duckling long instead. On Friday, WTW pulled down toward its 50-dma as volume dried up to -55% below-average, putting in a buyable position using the 50-dma as a tight selling guide. It’s still there, and still buyable on that basis.

First Solar (FSLR) got slammed with some heavy selling early in the day on Thursday, breaking below the lows of its current four-week base. Things were looking dire at that time, but it then found its feet and rallied back up through the 20-dema to post an undercut & rally (U&R) move back up through the prior 66.61 low in the pattern.

That move also qualified as a supporting pocket pivot at the 20-dema. It was followed by tight action at the 10-dma on Friday with volume drying up to -62% below-average. The optimal entry was on the U&R move, but that would have required nerves of steel to act on, unless one set aside all emotion and simply bought on the move up through the prior 66.61 low and used it as a tight selling guide. This may be buyable here, perhaps using the 20-dema as a selling guide.

SolarEdge (SEDG) was also hit with selling volume on Thursday early in the day, and closed just below the 20-dema. This doesn’t look like it’s in a buyable position, since it closed well in the lower half of its trading range on Thursday. The selling in SEDG and FSLR on Thursday appeared to be related to a Wall Street Journal story about solar companies increasing shipments ahead of “trade changes.” Whatever, the reason for the odd action, FSLR acted much better on the recovery.

Alibaba (BABA) and Weibo (WB), look nearly identical on their weekly charts, so showing the chart of BABA alone suffices. Both stocks had strong pocket pivot moves up through their 50-dmas on Tuesday, as I blogged at the time, and BABA provided a secondary entry on Wednesday when it pulled back slightly to test the 50-dma.

I’m not sure if this is the “square box” base pattern that you read about in IBD, since I find the explanatory articles somewhat vague. If there is such a thing as a square box the weekly patterns of BABA and WB (as well as NVDA, further above) have the look of a square box. Whatever the label for such a chart pattern, it’s much more precise to simply go with the pocket pivots coming up through the 50-dma when they occur.

If we think about it in Ugly Duckling terms, this is actually a “LUie” formation on the weekly chat, and it does correspond to the same thing on the daily charts. It’s just that the lower part of the “L” takes longer to form. We could even think of SQ’s pattern as a LUie type of formation, but again, what you call it doesn’t matter since you simply use more precise entry signals like U&Rs or pocket pivots, for example, rather than buying something solely based on a label after the stock breaks out. I prefer precision over labels.

YY, Inc (YY) on the other hand, is just a breakout from a five-week base on higher weekly volume. However, it was better bought at the 10-dma on the low-volume pullbacks into the line, as discussed in recent reports. Note that if you want to be uber-technical on this, you would say that the bounce off the 10-week moving average was a wedging rally back up to the highs of the base.

In traditional O’Neil-style analysis, this can be a cautionary sign. It then holds tight for one week while volume goes to nothing, and then pops out of the base this past week on higher volume. However, just sticking to the precise action on the daily chart would have you in before the breakout, per my prior discussions of the stock. YY is now extended pending any constructive pullbacks to its 10-dma at 117.63.

As a handy reference, below is a table showing expected earnings dates for all stocks discussed in this report. The column labeled “Ern Due” is sorted by date, with the nearest dates at the top. This is an at-a-glance guide, so please make sure that you confirm the earnings dates through other sources, including Briefing.com or the company websites of each stock. Nothing worse than getting caught by surprise with the wrong earnings date.

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

The rotation back into previously dormant tech, internet, and growth names continued unabated all week long. As these stocks come to life, some have broken out of bases, but most were buyable earlier in the week as they posted pocket pivots, U&Rs and other actionable signals nearer to the lows or mid-points of their current chart patterns.

The action has been nothing short of spectacular, and I am particularly pleased with the way SQ has acted. I’ve been studying the concept of descending wedges as potential bottom-buying formations, and when they can be used in conjunction with U&Rs or bottom-fishing/roundabout pocket pivots, so much the better. When it works, there is nothing more beautiful, in my view.

For now, members should simply continue to abide by the set-ups they see in real-time. I would not get obsessed with buying all of them, as a handful of strong situations are more than enough to participate in this current index breakout and rally phase. Where it begins to slow down in the near-term however, is difficult to determine, since already we are hearing from pundits that the market is again going too far too fast.

That may be so, but just stick to the set-ups, keep your entries to lower-risk points, and take it from there. There is no need to overthink things. For now, the market rally remains in force and appears to be gathering momentum ahead of “earnings roulette” season. Play it as it lies.

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held s positions in SQ and WTW, though positions are subject to change at any time and without notice.